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Analysis of the Integrated Water Cycle Segment

The Group currently operates in the integrated water cycle management sector in over 180 municipalities, with more than 2.5 million inhabitants, with almost complete coverage of the area in question.
Hera operates through seven Aatos in the Provinces of Ravenna, Ferrara, Forli-Cesena, Rimini, Modena, Bologna and Pesaro.
Agreements were set up with all of the aforementioned agencies regulating the integrated water service, and in addition to lengthening the license terms up to 2022 on average, also guarantee the Group the return on its capital investment over the next few years.

The integrated water cycle segment demonstrated improved results compared to last year, and its percentage weight has increased as can be seen in the table below:

(mln/)

31-Dec-2006

31-Dec-2007

Change

Change %

Area EBITDA

107.5

118.5

+11

+10.2%

Group EBITDA

426.7

453.4

+26.7

+6.3%

Percentage Weight

25.2%

26.1%

+0.9 p.p.

The results at the end of 2007 disclose a trend in line with expectations, involving an increase in revenues linked to the tariff structure approved by the agencies.

An analysis of the operating results achieved in the integrated water cycle area is shown below:

Income statement
(mln/)

31-Dec-2006

Inc%

31-Dec-2007

Inc%

Change

Change %

Revenues

398.4

407,6

+9.2

+2.3%

Operating costs

(319.2)

-80.1%

(342.0)

-83.9%

+22.8

+7.1%

Personnel costs

(85.3)

-21.4%

(89.8)

-22.0%

+4.5

+5.3%

Capitalised costs

113.6

28.5%

142.7

35.0%

+29.1

+25.6%

EBITDA

107.5

27.0%

118.5

29.1%

+11.0

+10.2%

Revenues of Euro 407.6 million were achieved in 2007, up 2.3% from 2006 in relation to the increased tariffs mentioned. A detailed analysis can be found in the specific section of this report. A reduction in the amount of work carried out compared to the previous year affected the amounts in the opposite direction.

The increase in overall costs amounts to Euro 27.3 million. Taking into consideration the increase in capitalised costs for Euro 29.1 million, operating costs decreased due to the fact that less raw material was purchased, and efficiency was increased.

The increase in capitalised costs was for the increase in investments in the water cycle, as detailed in the paragraph on this, and was entirely realised by the local operating companies (Sot) within the Group organisation.
The following table notes the main quantitative indicators in the segment:

Quantitative data

31-Dec-2006

31-Dec-2007

Change

Change %

Number of users (thousand units)

982.4

1,015.0

+32.6

+3.3%

Volumes sold (millions of cubic metres)

Aquduct

243.6

241.1

-2.5

-1.0%

Sewerage

215.0

216.0

+1.0

+0.5%

Purification

216.5

216.2

-0.3

-0.1%

The above-mentioned weather trends and the consequent decrease in precipitation led to reduced availability of the sources that were generally used by the Group, especially the Ridracoli Dam owned by Romagna Acque. There was also an increased awareness by society in general that water resources should be used responsibly. The effect was a fall in the average per head consumption, quite significantly in some cases.

The EBITDA at the end of 2007 increased by Euro 11.0 million, increasing from Euro 107.5 million in 2006 to Euro 118.5 million in 2007.

It should be noted that the increase in gross margin is connected to the increase in investments, required by the agreements signed with the agencies, and the consequent increase in amortisation/depreciation that is particularly sensitive in this business segment.